THE BANKING SECTOR

| Rahul | Milind | Jaipratap | Pulkit | Shweta |

Group-4 | Manoj | Ramprakash | Pranay | Atul |
Contents
 Dimensions of sector
 Geographical reach
 Growth and market share
 Deployment of funds
 Financial Indicators
 Investments Required
 Regulation and legislation
 Brand value of Indian banks
 Bank Valuations
 Non bank valuations
 Outsourcing pie
 Mergers and acquisitions
 Insurance
 Regulation
 SWOT
Dimensions of the sector

 174 commercial banks in India (of which 91 RRBs)Operating

with 77773 branches (March 08)
 Nearly 62% of branches are in rural/semi-urban areas
 Banks are supporting growth in the economy by financing
productive sectors
 The banking and financial sector currently employs 8.49 lakh
individuals and this figure is expected to grow to 1.28 lakhs
approx. in next five years
Geographical reach

Number of bank branches(including offices) in India

 Rural 30977
 Semi urban 17656
 Urban 15245
 Metropolitan 13895
 Number of branches increased in last 8 years i.e from FY’2000 to
FY’2008 are 9836
 By March’08 there is 1 branch on every 15000 individuals
Current Snapshot
 Loans and Advances from scheduled commercial banks
Rs.27,57,210 crores as on 05/06/2009
 Deposits Rs.39,71,651 crores as on 5/06/2009
 Cash-Deposit ratio 6.04
 Investment deposit ratio 32.10
 Credit deposit ratio 69.42
 Deposit growth Rs.1,37,541 crores since March’09
 Credit growth Rs.(18,339) crores since March’09

Profit after tax Rs.40,971 crore in 2007-08 with a growth of 39.17% as against
24.40 % in 2006-07
Growth in Banking sector(percent)
Share in Gross Bank Credit- Bank Group-wise (Mar‘08)

Percentage

Private Sector banks

26%

Public Sector banks

68%

Foreign Banks
6%
Share in Aggregate Deposits - Bank Group-wise
Selected Banking Aggregates
Industry-wise deployment of Gross Bank
Credit(Mar’08)
Movements in CRAR and NPAs of SCBs
Selected Financial indicators(Percent)
Capital Investments required
 Capital adequacy ratio requirements

For Scheduled Commercial Banks CAR= 9%

For New Private Sector Banks CAR = 10%
For Banks undertaking Insurance Business CAR = 10%
 For New Banks: Initial minimum paid-up capital for a new bank is
Rs.200 crore. The initial capital will be raised to Rs.300 crore within three
years of commencement of business
 Average Capital to risk weighted asset ratio for the Indian banking system
as at the end of march’08 was 12.6%
Capital Investments required(contd..)

 In the next five years Banking sector would require additional capital of Rs
5,68,744 crore is based on the assumption that banks would maintain
capital-to-risk-weighted assets ratio (CRAR) at 12 per cent(Reserve Bank of
India’s Report on Currency and Finance)
 Public sector banks would require Rs 3,69,115 crore (64.9 per cent of total
requirements),
 Old private sector banks Rs 23,319 crore (4.1 per cent),
 New private sector banks Rs 1,13,180 crore (19.9 per cent)
 And foreign banks Rs 63,131 crore (11.1 per cent).
Capital Adequacy Ratio - Bank Group-wise(Percent)
Banking Services

 Deposit Products
 Loan Products
 Remittance facilities
 Other facilities: Bank Guarantees, letter of credit etc.
 Bill Discounting and Merchant Banking
 Brief financials of major Banks
Corporation
SBI ICICI HDFC Axis bank BoB BoI Canara

Sales 63,788.43 31,092.55 16,332.27 10,835.48 6,067.35 15,091.58 16,347.36 17,119.06

EBDIT 15,499.20 5,738.55 3,928.87 3,081.73 1,436.52 3,730.20 4,429.42 3,963.77

PAT 9,124.18 3,740.62 2,240.75 1,823.56 802.19 2,227.25 3,007.35 2,072.42

CAR 12.97 15.53 15.1 13.69 13.66 12.88 13.01 14.1

NIM 2.47% 2.14% 4.69% 2.86% 2.20% 0.03 2.74% 2.78%

EPS 143.71 33.62 52.68 50.79 55.93 61.14 57.26 50.55

BV/ share 912.73 445.17 344.44 284.53 341.36 352.37 224.39 208.33

P/E RATIO 12.5 23.3 29.3 16.7 5.5 7.3 6.1 5.2

CMP 1748 754.00 1496 818 331 435 345 266

 Important ratios
CORPORATIO BANK OF BANK OF CANARA
Ratios  SBI ICICI HDFC AXIS N BANK BARODA INDIA BANK

Credit-
75 95.9 66.6 68.9 67.77 72.78 75.47 69.4
Deposit(%)

Investment /
36.4 46.4 44.4 39 32.66 27.96 27.79 32.06
Deposit (%)

Other
Income / Total 16.6 20.8 17.5 21.6 15.44 15.58 15.73 13.98
Income (%)

Operating
Expenses /
20.5 19.3 28.9 20.8 13.97 20.14 15.95 17.49
Total Income
(%)

RONW (%) 17.1 7.83 16.9 19.1 19.57 18.65 29.18 19.08
 SBI & Assosciates
26%

ICICI Bank
Others 7.5%
40%

Canara Bank
PNB 5%
5%
Bank of India
5%
Bank of Baroda
Axis Bank HDFC Bank
5%
2% 3.5%

Market share of banks in India

 Brand Value of Indian Banks in Global Market

Brand Value Market Cap Brand

Rank Bank
(US$ in mn) (US$ in mn) Value/Market Cap

70 State Bank of India 1448 9834 15%

110 ICICI Bank 939 7893 12%

153 HDFC Bank 611 7785 8%
Punjab National
192 384 2853 13%
Bank
228 Bank of India 273 2567 11%
251 Canara Bank 243 1363 18%
260 Bank of Baroda 229 1867 12%
269 Axis Bank 205 2935 7%
Kotak Mahindra
280 188 2388 8%
Bank

351 Union Bank of India 137 1466 9%

Source: BrandFinance Global Banking 500 Report, 2009

The methodology employed by Brand Finance in this Global Banking 500 listing uses a discounted
cash flow (DCF) technique to discount estimated future royalties, at an appropriate discount rate,
to arrive at a net present value (NPV) of the trademark and associated intellectual property: the
brand value.
Indian Banking Scenario
PSU Banks Rank among Indian Companies

State Bank of India 13

Bank of India 92

Central Bank of India 134

Bank of India 135

Punjab National Bank 136

Private Banks Rank

ICICI Bank 98

HDFC Bank 124

Axis Bank 190

Kotak Bank 226

Source: Brand equity survey, 2009

Brand Equity of Foreign Banks
Foreign Banks Rank

CitiBank 219

Standard Chartered Bank 255

HSBC 264

American Express Bank 279

ABN Amro Bank 286

Although these foreign banks rank very high in world top 500 Brand Value, in India
it is still very lowly ranked.
Regional Comparison of Banks
Brand Equity - Observation
 Only 1 Indian Bank (SBI) in world’s top 100 banking brands
while there are 3 Chinese banks in top 25 itself (Including
rank 5).
 Combined Brand value of Indian Banks have declined while
that of other BRIC countries including Russia increased over
last year 2008-2009.
 Even in India, just SBI (13) is within top 50 companies w.r.t.
Brand equity.
 Hence need to enhance the Brand Value of Indian banks both
within India and outside to get more premiums on their
services.
Valuation of Banks
 Key comparative Factors
 Growth
 RoE

 Steady Earnings

 Other Factors
 New Product Introduction
 Consolidation

 Changes in Balance Sheet due to new regulation

 Changes in Legal environment

 Ownership limits

 Regulatory Impositions
Higher Growth and hence Higher Valuation
Non-Bank Business Valuation
Annualized Premium Growth- Insurance

Positive Impact due to Insurance Amendment Bill tabled in Parliament which

allows Insurance companies to list and hence unlock their value .

Key beneficiary would include ICICI Bank, HDFC Bank, Kotak, SBI

Valuation of 5-6% of AUM is attributed to the Asset Management holdings of

banks
Parameters in CMP
Breakup of a Financial Services Company

 Front Office
 Sales Personnel
 Corporate finance

 Middle Office
 Risk, research and IT services

 Back Office
 Administrative and support services
Outsourcing Scope

 Support functions
 Accounts management
 Facilities Management
 Research management
 Accounts Payable
 Accounts Receivable
 Treasury
 General Ledger
Mergers and Acquisition in Indian Banking
Sector
 With 27 public, 31 private and 29 foreign banks , a
consolidation exercise is bound to happen in Indian
Banking sector
 Shares as a risk mitigation and sharing exercise
 By 2010, Indian banking system needs a capital
infusion of around $10 million.
 But consolidation enthusiasm doesn’t exists right
now in Indian market
Mergers and Acquisition
 SBI recently merged State Bank of Indore within itself
Last year, it completed an acquisition of an
Indonesian bank
 Bank of India expands its presence in Africa. Opens up
branches in Kenya and is looking for an acquisition.
 Reports of SBI looking to buy a mid sized bank
abroad, with a deal size between $1.5-2 billion
 Major presence abroad in 27 countries
 Reports of IDBI scouting for a bank has also emerged
INDIAN BANKS ABROAD
 Bank of India is looking at buying out a local rival in
Kenya
 State Bank of India acquired 76 % shares of
IndoMonex (2006) , Mauritius bank
 ICICI Bank (NYSE:IBN) has acquired the entire paid-
up capital of Investitsionno-Kreditny Bank (IKB), a
Russian bank
 IDBI Bank has acquired a portfolio of over 2,500
merchant establishments from BNP Paribas, the
French bank
INSURANCE
 From Bancassurance to insurance
 Bank-distribution model shaking
 Union Bank is a partner in Star Union Dai-ichi Life
Insurance
 Bank of Baroda has tied up with Andhra Bank and
Legal & General for an insurance venture
Indian banking sector set to open up by 2009

 March 2005 -2009 foreign banks that were so far

restricted to branch operations could also set up
wholly owned subsidiaries
 Foreign bank subsidiaries with a minimum capital
requirement of Rs 3 bn would be allowed to carry
out branch expansion
 Foreign banks cannot grow unrestrained; can buy
only weak local banks the regulator identifies (with
an investment of up to 74 per cent)
Developmental and Regulatory framework
Regulatory permissions and their significance

 Reserve bank of India is the chief regulatory body in India

which ensures all the Banks follows the regulatory
requirement for doing business in India
 Stipulation of capital requirements and strengthening of risk
management processes to achieve and maintain financial
stability
 Stable environment for market players
 Boosting investments
 Efficient allocation of resources
Banking Legislation
 Apart from the BR Act which governs all the scheduled commercial banks,
there are various other legislations governing different bank groups.
 The nationalised banks are governed by two Acts, viz., the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970 and
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
 The State Bank of India and the subsidiaries of State Bank of India are
governed by two legislations, viz., State Bank of India Act, 1955 and State
Bank of India (Subsidiary banks) Act, 1959,respectively.
 IDBI Bank is governed by the Industrial Development Bank (Transfer of
Undertaking and Repeal) Act, 2003.
 The private sector banks come under the purview of the Companies Act,
1956.
 The overall regulation of the banking sector is governed by the BR Act.
Financial Stability

 Committee on Financial Sector Assessment

(CFSA)
 To constitute a task force with regard to G-20
working groups
 To set up a Financial Stability unit in Reserve Bank
Interest Rate Policy

 Benchmark Price Lending Rate (BPLR) Sytem

Review
 Payment of Interest on Savings Bank A/c on a daily
product basis
Financial Markets: Money Market

 Special Refinance Facility: Extension

 Special Term Repo Facility: Extension
 Export Credit Refinance: Extension
 Money Market Mutual Funds
 Interest Rate Futures
Financial Markets: Foreign Exchange
Market

 Extension of Relaxation of all in cost ceilings

 Liberalization of the policy on buyback of FCCBs
 Loans against Non-Resident Deposits
 Currency Futures
Credit Delivery Mechanism
 Credit flow to the MSE Sector
 Rural Cooperative Banks
 Licensing of Cooperatives
 Revival of Rural Co-operative Credit Structure
 Regional Rural Banks
 Capital to Risk-weighted Assets Ratio
 Assistance to RRBs for adoption of ICT solutions
 Amalgamation
 Recapitalization
 Technology up gradation
 Delivery of Credit to agriculture and other segments
 Kisan Credit Card Scheme and Rural Infrastructure Development Fund
 Interest Subvention relief to farmers and Micro Finance
Prudential Measures

 Further Relaxation in the Branch Authorization Policy

 Mitigating Pro-cyclicality: Use of Floating Precisions
 Credit Rating Agencies
 Liquidity Risk
 Relaxing Eligibility Criteria for Banking Correspondents
 Private Pool of Capital and Stress Testing
Institutional Developments
 Final guidelines for Prepaid Payment Institution in
India
 Consolidation of Information Technology System
 Adequacy of the feedback arrangements for managed IT
Systems
 Recent Developments
 Electronic Payment Systems
 National Electronic Clearing Service
 Rationalization of charges for payment systems
 The Payment and Settlement Systems Act, 2007
SWOT - Strength
 Strong growth - The banking index has grown at a compounded annual
rate of over 51 per cent since April 2001 as compared to a 27 per cent
growth in the market index for the same period.
 Strong policy and regulations to help strengthen the sector.
 Bank lending has been a significant driver of GDP growth and
employment.
 Extensive reach - The vast networking & growing number of branches &
ATMs. Indian banking system has reached even to the remote corners of
the country.
 The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalization of 14 major private banks of India.
 Quality assets and capital adequacy - Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region.
 Foreign banks will have the opportunity to own up to 74 per cent of Indian
SWOT - Weakness
 Banks need to fundamentally strengthen institutional skill levels especially in sales
and marketing, service operations, risk management and the overall organizational
performance ethic & strengthen human capital.
 The cost of intermediation remains high and bank penetration is limited to only a
few customer segments and geographies.
 Structural weaknesses such as a fragmented industry structure, restrictions on
capital availability and deployment, lack of institutional support infrastructure,
restrictive labour laws, weak corporate governance and ineffective regulations
beyond Scheduled Commercial Banks (SCBs)
 Refusal to dilute stake in PSU banks - The government has refused to dilute its
stake in PSU banks below 51% thus choking the headroom available to these banks
for raining equity capital.
 Impediments in sectoral reforms - Opposition from Left and resultant cautious
approach from the North Block in terms of approving merger of PSU banks may
hamper their growth prospects in the medium term.
SWOT - Opportunities
 Opportunities in credit cards, consumer finance and wealth management on the
retail side, and in fee-based income and investment banking on the wholesale
banking side. These require new skills in sales & marketing, credit and operations.
 Banks will no longer enjoy windfall treasury gains that the decade-long secular
decline in interest rates provided. This will expose the weaker banks.
 With increased interest in India, competition from foreign banks will only intensify.
 Given the demographic shifts resulting from changes in age profile and household
income, consumers will increasingly demand enhanced institutional capabilities and
service levels from banks.
 New private banks could reach the next level of their growth in the Indian banking
sector by continuing to innovate and develop differentiated business models to
profitably serve segments like the rural/low income and affluent/HNI segments
SWOT - Opportunities
 With the growth in the Indian economy expected to be strong for quite some
time-especially in its services sector-the demand for banking services, especially
retail banking, mortgages and investment services are expected to be strong.
 Reserve Bank of India (RBI) has approved a proposal from the government to
amend the Banking Regulation Act to permit banks to trade in commodities and
commodity derivatives.
 Liberalisation of ECB norms: The government also liberalised the ECB norms to
permit financial sector entities engaged in infrastructure funding to raise ECBs.
This enabled banks and financial institutions, which were earlier not permitted to
raise such funds, explore this route for raising cheaper funds in the overseas
markets.
 Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has
allowed them to raise perpetual bonds and other hybrid capital securities to shore
up their capital
SWOT - Threats
 Threat of stability of the system: failure of some
weak banks has often threatened the stability of the
system.
 Rise in inflation figures which would lead to
increase in interest rates.
 Increase in the number of foreign players would
pose a threat to the PSB as well as the private
players.
 Challenges Ahead
 Improving profitability:
 Increasing competition, narrowing of spreads. The challenge for banks is

how to manage with thinning margins while at the same time working to
improve productivity which remains low in relation to global standards.
 With falling spreads, rising provision for NPAs and falling interest rates,

greater attention will need to be paid to reducing transaction costs.

 Reinforcing technology:

 Strategic and integral part of banking

 Implement systems that enable them to provide products and services in

large volumes at a competitive cost with better risk management

practices.
 Risk management:

 Credit Risk, Market Risk, Operational Risk, Country Risk

Challenges Ahead
 Sharpening Skills
 Need for specialized Banking Functions(Retail, Treasury, Risk,
Foreign Exchange, development banking and IT)
 Greater customer Orientation
 Strive and attract demanding customers, enhancing quality,
innovative products, and market variety of products
 Corporate Governance
 Importance of institutional and individual shareholders will
increase. Need a common code representing all the fractions
 International Standards
 Internationally followed best practices, universal codes of
conduct is necessary. Full transparency in disclosures
THANK YOU